Is Your Retirement Money at Risk?

Since May 10, 2005, when a bankruptcy judge let United Airlines default on its pension plan, employees at all types of companies have started to wonder whether their retirement money is safe. The good news: It probably is.

Retirement Plans Explained

The United case applies to traditional defined-benefit pension plans, which guarantee workers a defined monthly income after they retire. When employers like United run into financial troubles and can no longer afford to pay benefits, the Pension Benefit Guaranty Corp. (PBGC), a government agency, generally takes over to guarantee payments continue.

Most workers at those companies that have defaulted on pension plans end up getting their full pension payouts from the PBGC. For plans taken over in 2005, the PBGC will pay up to $45,614 this year to people who retire at 65 (the maximum is lower for early retirees). If the annual pension payout is less than that, the recipient still receives the full amount he’s been expecting from his pension. The average pension payout is currently just $14,000, according to the Employee Benefit Research Institute (EBRI).

And many people don’t need to worry about traditional pensions anyway. Instead, more employers now offer defined-contribution (not defined-benefit) retirement plans, such as 401ks. These types of plans let you contribute pretax money, which your employer may match. You won’t owe taxes until you withdraw the funds when you’re retired. You’re responsible for your investment choices and for any gains or losses; your employer is off the hook, even if the account loses money. In 1991, 26.1 million people were covered by defined-benefit plans, while 30.4 million had defined-contribution plans. By 2003, only 21.4 million had defined-benefit plans, while 52.1 million had defined-contribution plans, according to EBRI.

People with defined-contribution plans need not worry about their employer’s financial health when it comes to their retirement nest egg. Money in 401ks and other similar plans is held in trust for you, and it’s illegal for your employer to touch it.

Protect Your Financial Future

But even if the odds are good that your retirement money is safe, this is a perfect opportunity to review your savings plans and make sure you aren’t counting on money that may never appear. Here are some simple steps to take:

• Find out whether any of your pension money is at risk, especially if you work in the troubled auto, airline or steel industries, recommends Ken Robinson, a certified financial planner with The Monitor Group in McLean, Virginia. Several of his clients are retired pilots with United and other airlines, and he’s helping them figure out whether they’d lose money if the PBGC took over their company’s plan. “In a situation like that, it’s very difficult, because you’ve been planning all along for a certain benefit,” he says. In that case, clients need to set aside more money in their own retirement accounts to help fill any gaps.